Myanmar capital markets: what to expect

Author: Ashley Lee | Published: 27 Jun 2013
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  • The Yangon Stock Exchange is scheduled to open in 2015. But it’s unclear what will happen to the public companies whose shares are traded on Myanmar’s unregulated OTC equities market;
  • The country also lacks a securities law and a dedicated regulator. Market participants, including those trading on the OTC equities market, look forward to more legal certainty;
  • It is also unclear whether foreign investors will be allowed to trade on the Yangon Stock Exchange when it opens. If they are not permitted to purchase shares, market participants expect that more companies will look to list in Singapore.

Although the Yangon Stock Exchange (YSE) is not scheduled to open until 2015, Myanmar’s nascent over-the-counter (OTC) equities market has recently drawn foreign investor interest.

A few companies, such as Yoma Strategic Holdings, have successfully listed on the Singapore Exchange via reverse takeover. However that has proved to be a difficult route for Myanmar corporates due to US sanctions as well as human rights concerns.

It is otherwise impossible for foreign investors to tap Myanmar companies in the capital markets, as the country lacks an official stock exchange. However under its Companies Law, companies can become public and sell shares OTC. But this has so far been an unregulated market – Myanmar lacks a securities regulator or a securities law.

Jeremy Rathjen, vice president of research at Myanmar research, consulting and capital markets firm Thura Swiss, explained that there are two companies listed on the Myanmar Securities Exchange Centre, but most public companies in Myanmar aren’t listed. Instead, public companies exist due to a provision in the Companies Act, and their shares are traded OTC.

Therefore, there is no formal price discovery, and all shares must be traded via brokers. The OTC market is also illiquid.

Further, Rathjen told IFLR that the OTC market has virtually no regulation: each company has its own rules, rather than an overreaching body.

"We expect that to be fixed, but if the OTC market is permitted to continue operations, we’re not sure what regulations will be in place for the market," he said. "We would welcome legal infrastructure to reduce risk."

Paul Landless, a counsel at Clifford Chance, agreed that the OTC market lacks transparency. A broad and obvious statement is that it’s difficult to do due diligence on these companies, he said.

He added, "we don’t know what kind of financing support they’re getting in terms of bank debt, as well as what their assets are to get close to understanding valuations."

Rathjen agreed. ThuraSwiss released its first research report on June 14, focusing on First Myanmar Investment – the sister to Singapore-listed Yoma Strategic Holdings.

People know very little about public companies – even in the local market – and it’s difficult to make informed decisions, he said. Investors are unlikely to put money into Myanmar if they don’t have information, and the companies don’t benefit either: understanding the company allows investors to make better decisions.

The future of public companies

But it is unclear whether a regulator would approve of the existence of an essentially unregulated OTC market alongside the nascent Yangon Stock Exchange – especially since many of the public companies trading on the OTC markets are among the largest in Myanmar.

It is believed that companies listing on the Yangon Stock Exchange will encounter strict regulatory scrutiny to ensure that investors are comfortable with the integrity of Myanmar’s capital markets. The first listings will include some of the largest conglomerates in Myanmar – many of which are already public companies.

Landless noted that a groundswell of banking relationships is already being formed with these public companies. Once they go forward in a formal public listing, there will be additional requirements from a regulatory standpoint to make clear that they are test cases.

But the YSE will have stringent listing requirements. Rathjen said that companies will have to be profitable within the two years that lead up to the listing: if the YSE comes online in 2015 as planned, then companies must be profitable now in order to be qualified to list immediately.

Further, because there is no securities regulator in place, it is unclear what will happen to these large public conglomerates unable to list because they cannot comply with the listing rules.

Before the YSE’s 2015 establishment

Although it has been reported that the YSE is on schedule to open by 2015, practitioners are not entirely certain that all the infrastructure necessary – such as a securities law, a regulator and market regulations – will be available by 2015. The Tokyo Stock Exchange and Japan’s Daiwa Securities Group are working with the Myanmar government to bring its economy and regulations in line with international standards.

But DFDL’s William Greenlee said that 2015 is a rather ambitious timeline, especially considering there is no securities law in place.

The first step is the securities law, he added. But the second should likely be the formation of an independent ministerial-level Myanmar governmental body implementing the securities law and overseeing the future stock exchange and finally the creation of the stock market itself.

Greenlee, formerly based in Laos, noted that the situation in Myanmar is not unlike that of Laos, which has the newest stock exchange in Asia.

"Some might argue that the Lao exchange was opened prematurely because it was opened without promulgating its securities law first," he said. "The government had only issued a few notices related to basic regulations."

Instead, he hoped that Myanmar will go down a different route and promulgate a more evolved regulatory regime before allowing the exchange to actively list companies and trade.

But in a country dominated by tycoon-run conglomerates, Landless encouraged a focus on shareholder rights. New regulations should include a clarification of shareholder rights, particularly minority shareholder rights.

"They should include understanding how directors are held for account – noting the classic Western disconnect between owners and managers – and how that balance is being set and disclosed," he added.

Listing in Singapore?

In the meantime, Myanmar conglomerates are able to list in Singapore via reverse takeovers – Yoma Strategic Holdings has been listed since 2006.

But this model is risky: the SGX’s rejection of Max Myanmar’s application to merge with Singapore-listed Aussino highlighted sanctions risk for foreign investors. The SGX noted concerns about owner U Zaw Zaw’s placement on the US’ sanctions list, the company’s alleged human rights abuses and a tax investigation by authorities in Myanmar.

Market participants agreed that Myanmar conglomerates may not be prepared for the requirements of listing on an international exchange. But that may change quickly if foreign investors are unable to invest on the YSE.

Although a few domestic firms are looking at RTOs in Singapore, it may be easier to list on a domestic exchange or to complete a dual listing following the establishment of the YSE, Rathjen said.

"If foreign investors are able to purchase shares of Myanmar companies on the YSE, that drastically lessens the advantage for Singapore RTOs," he said. "But if foreign investors are unable to take shares in local companies, companies will look to Singapore."

Landless agreed, saying that companies will look to the SGX as a key to global recognition and global standards for analyst coverage and market access.

But, he added, Myanmar companies will rely on bilateral investors and strategic relationships.

"There’s no real need to enter the public universe from an investment financing perspective," he said. "They have sufficient relationships so that they can take their time before entering the exchange-listed environment."

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